Feb. 28 (Bloomberg) -- U.S. stocks tumbled the most in a week after slower-than-forecast economic growth, rising jobless claims and Federal Reserve Chairman Ben S. Bernanke's warning of possible failures among smaller banks deepened concern a recession is inevitable.

JPMorgan Chase & Co., Bank of America Corp. and American International Group Inc. sent financial shares to their biggest slide in three weeks. Centex Corp., D.R. Horton Inc. and Lennar Corp. led homebuilders to their steepest drop since Jan. 4. Sprint Nextel Corp. retreated to a five-year low after the mobile-phone company lost a record $29.5 billion.

The Standard & Poor's 500 Index declined 12.34 points, or 0.9 percent, to 1,367.68. The Dow Jones Industrial Average fell 112.1, or 0.9 percent, to 12,582.18. The Nasdaq Composite Index lost 22.21, or 0.9 percent, to 2,331.57. Three stocks dropped for every one that rose on the New York Stock Exchange.

``We're still seeing the fallout from housing, and the credit crunch is still unfolding,'' said Alan Gayle, senior investment strategist and director of asset allocation at Trusco Capital Management in Richmond, Virginia, which oversees $17 billion of equities. ``It seems like every credit rock you turn over has something crawl out from underneath it.''

The S&P 500 has dropped 6.9 percent this year on concern the collapse of subprime mortgages and an economic slowdown will drag down profits. Eight of 10 industry groups in the S&P 500 retreated today after government reports showed gross domestic product grew by 0.6 percent last quarter, less than the 0.8 percent estimated by economists in a survey, and initial jobless claims grew by a more than-forecast 19,000 to 373,000 last week.

Earnings Slump

Earnings have slumped 16 percent on average at the 440 members of the S&P 500 that reported fourth-quarter results so far, according to Bloomberg data. During the first quarter, profit will decline 1.6 percent, according to the average of analyst estimates.

JPMorgan fell $1.97, or 4.4 percent, to $42.44 on the NYSE for the biggest drop in the Dow average. Goldman Sachs Group Inc. and Merrill Lynch & Co. analysts reduced their forecasts on expectations of writedowns in the value of home-equity loans. Bank of America, the biggest U.S. bank by market value, retreated $1.46 to $41.42.

AIG

AIG dropped on speculation the world's largest insurer may report its first quarterly loss in five years. Chief Executive Officer Martin Sullivan, who has failed to win the confidence of shareholders since he succeeded Maurice ``Hank'' Greenberg in 2005, may report a fourth-quarter loss of $1.20 a share, according to Goldman Sachs analyst Tom Cholnoky.

AIG fell $2.10, or 4 percent, to $50.15.

Financial shares lost 3 percent, the most among 10 industries in the S&P 500. Bernanke, testifying before Congress about the state of the economy, said ``there probably will be some bank failures.'' Large banks will likely be spared because they have enough cash to stay solvent, he added.

The KBW Regional Banking Index declined 3.2 percent as 48 of 50 members fell. Moody's Investors Service downgraded eight regional and community banks including Susquehanna Bancshares Inc. and Trustmark Corp., citing possible losses on commercial real estate. Susquehanna fell 48 cents, or 2.2 percent, to $21.34. Trustmark declined 79 cents, or 3.8 percent, to $19.97.

Homebuilders in the S&P 500 lost 8.1 percent as a group. Centex tumbled $2.46 to $23.71. Lennar fell $1.76 to $19.44. D.R. Horton lost $1.58 to $15.52.

`Fallout'

``There will continue to be fallout from the weakness in the housing market and in consumer credit,'' said Michael Barron, chief executive officer of Knott Capital Management, which manages $1 billion in Exton, Pennsylvania. ``Earnings estimates for the second half of this year are still too high.''

Sprint Nextel declined 86 cents, or 9.6 percent, to $8.09. The company's per-share loss was $10.36 in the fourth quarter as customers defected and it wrote down the value of the purchase of Nextel Communications Inc. Sprint also eliminated its dividend.

Verizon Communications Inc. and AT&T Inc. rose the most in the Dow average, leading telephone stocks to a 1.2 percent advance as a group. New pricing plans announced by Sprint may allow AT&T and Verizon ``to continue to take market share,'' Oppenheimer & Co. analyst Timothy Horan wrote in report today. Verizon climbed 79 cents to $37.18. AT&T rose 76 cents to $35.96.

Fed Watch

The two-year Treasury note's yield declined to an almost four-year low and the dollar fell to a record low against the euro for a third straight day on expectations for more interest- rate cuts by the Fed. The odds of a three-quarter-point reduction in the overnight lending rate target by the Fed's March 18 meeting increased to 38 percent from 10 percent yesterday in the interest-rate futures market. The remainder of the bets are on a half-point cut, according to futures trading.

The Fed has lowered the target five times since September, most recently to 3 percent on Jan. 30.

Limited Brands Inc. fell the most since September 2001, retreating $1.97, or 11 percent, to $15.85. The owner of the Victoria's Secret lingerie chain forecast first-quarter profit of 5 to 10 cents a share, compared with 13 cents projected by analysts surveyed by Bloomberg.

Mylan Inc. sank $1.12 to $12.03. The company said it had a quarterly loss of $1.38 billion on expenses from its $6.9 billion purchase of Merck KGaA's generics unit.

Thornburg Mortgage Inc. tumbled $1.78, or 15 percent, to $9.76. The mortgage lender that specializes in adjustable-rate loans said it may have to sell assets to meet lenders' demands for increased collateral after prices of mortgage-backed bonds extended declines this month.

`Bumps Ahead'

Freddie Mac fell for the sixth straight day, dropping 60 cents to $24.49, an 11-year low. The second-largest mortgage- finance company posted a record $2.45 billion fourth-quarter loss as rising defaults sent credit costs soaring.

Fannie Mae, its larger rival, added 63 cents to $27.90.

``There will be a lot of bumps ahead'' for both companies, David Dreman, chairman of Dreman Value Management LLC in Jersey City, New Jersey, said during an interview with Bloomberg Radio. He owns shares of Freddie Mac and Fannie Mae.

``This financial crisis will take some time to settle down,'' Dreman added. ``But if we look back two or three years from now, we will see some pretty good performance in these stocks,'' with gains of 40 percent to 50 percent possible in the next three years.

Energy Rally

Energy companies in the S&P 500 climbed 1.4 percent as a group as crude oil rose to a record $102.59 a barrel in New York.

EOG Resources Inc. climbed to a record and led gains among the group, surging $19.05, or 18 percent, to $124.73. The U.S. natural-gas producer born out of Enron Corp. boosted its production targets for 2009 and 2010, citing four crude-oil and natural-gas discoveries.

Natural gas futures rose 5.7 percent, the most since October, to $9.44 per million British thermal units on the New York Mercantile Exchange. The AMEX Natural Gas Index of 15 companies climbed to a record. Devon Energy Co. rallied $5.38, or 5.3 percent, to $106.04. XTO Energy Inc. added $2.48, or 4.1 percent, to $63. Apache Corp. rose $5.85, or 5.2 percent, to $119.40.

Fluor Corp. increased $10.41, or 7.9 percent, the most since May 2006, to $142.48. The largest publicly traded U.S. engineering company raised its 2008 earnings forecast after fourth-quarter profit tripled on higher demand from the oil, gas and power industries.

The 0.6 percent gain in gross domestic product from October through December matched the government's advance estimate issued last month and followed a 4.9 percent third-quarter pace, according to revised figures issued by the Commerce Department. Total benefit rolls rose for a second straight week to the highest since October 2005.

The Russell 2000 Index, a benchmark for companies with a median market value of $533 million, dropped 1.5 percent to 705.72. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 0.9 percent to 13,816.71. Based on its decline, the value of stocks decreased by $160.5 billion.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

Last Updated: February 28, 2008 16:55 EST